Why are most credits unsatisfactory

In practice, from what I have observed, the university shareholders’ agreement will contain the following provisions: There will be two classes of shareholders, namely the university (through its special purpose company) holding ‘A’ class shares; and the academic inventors holding ‘B’ class shares. The objects of the company will be something like: ‘The personal loans business shall be conducted in the best interests of the company on sound commercial principles so as to generate the maximum achievable maintainable profits available for distribution.’ – leaving no room for doubt as to why the university, at least, is involved in the enterprise!

The ‘B’ class shareholders (who will usually constitute the day-to day management of the company) will require the consent of the ‘A’ class shareholders before they can commit the company to financial liabilities or cash advances commitments above prescribed limits. Directors will be appointed to represent each class of shareholder and provision will be made that no business can be conducted at any board meeting unless an ‘A’ class director is present. www.paymentsavy.com offer a wide range of
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In the all-important cash advance area of share transfers, issues such as preemptive rights and transmission on death are usually included either in the agreement or the company’s Articles, but most university agreements provide limited protection to credit cards minority shareholders (usually the ‘B’ class/academic shareholders) omitting the ‘piggyback’ clause mentioned by Robson Rhodes. Also, the establishment of ‘fair value’ of shares is usually left to the auditors, a practice that is unsatisfactory in my view, for the reasons I have stated earlier in this blog.

A bad credit – where to draw the line

A major component in exit planning for any company with more than one owner is the shareholders’ agreement. One of the aims of a well drawn up shareholders’ agreement is to ensure that there are no barriers to exit for the majority shareholder.

A subsidiary aim could be to protect the rights of minorities in exit. The original shareholders in spinout companies can go through the process of being involved in more than one shareholders’ agreement. The first will be entered into when the company is originally set up (by the academics and the university), whilst the second and subsequent ones could arise when VCs invest in the company.

The Robson Rhodes report makes the following comments on the contents of related company shareholders’ agreement and Articles, which academics are asked to enter into with the university at start-up:

‘It would be normal to include pre-emption rights in the share transfer provisions of the joint venture company’s Articles of Association, requiring any shareholder wishing to dispose of his shares to offer them to other shareholders first before being entitled to transfer them to a third party.’

‘A minority shareholder will normally wish to build in certain protections of his position, which go beyond those provided by the general law.’ ‘Is there an exit strategy for the shareholders to realise their shareholding in the company? A majority shareholder will sometimes wish to have the right to require a minority shareholder to sell his shares if the majority shareholder wishes to sell his shareholding. Equally, a minority shareholder will wish to prevent a majority shareholder from selling unless the majority shareholder procures that any purchaser of its shares also offers to buy out the minority shareholder at the same price per share as it is prepared to pay for the majority holding.’

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It is easier to generalise about investors than academics as investor intentions are better documented. Most Business Angels seek an exit within five years, whilst institutional investors seek an exit in five to seven years. Their objectives are normally strictly commercial.

With most spinouts there seems to be, in theory, a consensus on exit objectives when the company is launched. Initial business plans almost always include routine statements such as: ‘Exit will be through a trade sale in five years’; or ‘Exit will be through a flotation in seven years’. This is aimed at keeping investors happy, but is it what the academics really want? And will they still wish for this outcome in three years’ time? As the business develops, the academic’s objectives might change.

Business life has its appeal to the CEO of a successful company. But, the power of minority shareholders is limited and exit decisions are usually out of their hands. If the business is successful enough, an exit through either a trade sale or an initial public offering (IPO) – and usually sooner rather than later – will be pushed through by the investors and the university. The investors usually control the business’s destiny and they will have ensured they have the final say on exit through the shareholders’ agreement, regardless of the personal wishes of the academics.

Your credit plans must be realistic

You now have a comprehensive MEP both in narrative and chart form and all that remains is for you to implement it! Unfortunately, despite all the work and expense business owners put into preparing plans, most of them are not implemented properly, if at all. All MEPs will be different in their detail and will have different objectives and ‘things to do’ and we cannot address all the different issues that could be involved in implementing your particular plan. We can, however, show you how to put systems in place to implement your plans, so that your hard work is not wasted.

Implementing plans should be a simple matter of doing those things that are included in the ‘things to do’ section of the plan. This sounds obvious and easy but, as I have said, the reality of business life is that most plans for many reasons are not implemented.

Some of this failure can be put down to incompetent or inadequate execution, but it is also true that some goals are simply not achievable, perhaps because the goals themselves were too optimistic. For example, you might set an objective to increase sales by 15% for each of the next four years, which might seem, in theory to be quite easy. But, if you analyse this more closely, this equates to an increase of nearly 75% in sales over four years. Ask yourself, is this realistic in the light of your sales resources and the state of the market? Also, have you delegated this difficult task to the right people?

In debt, but for the right reasons

Where you already have an operational business plan in your business (that is, a plan that lays down your operating objectives and the ways in which you are going to achieve them), your exit planning steps should be added to this plan to produce your MEP. Grooming a business can be seen as a way of improving profitability (and value on exit) and in this sense it coincides with the aims of most operational business plans.

When you design an MEP you are adding steps (or things to do) to a business plan, either chronologically before its normal time span (for example, deciding on a trading structure); or chronologically after it (for example, extending the trading targets to an exit date, which could be more than five years hence); or adding exit-specific steps to it (for example, identifying and removing impediments to sale, or drawing up a shareholders’ agreement).

Where you currently do not have a business plan, I suggest you think about having one drawn up. An operational business plan is essential in all businesses for reasons almost too numerous to mention and its activities (or things to do) will form a vital part of your MER.

Generalizing about a credit is not a bad idea

Most universities appear to have two major business objectives in setting up spinout companies, namely to enhance the public good through their research and to make money from it. This commercial objective (the ‘third stream’ of income – after top-up student fees and direct Government funding) is becoming an increasingly significant aspect of university funding and most universities in the UK are keen to develop this side of their business.

To maximise their return from spinouts, universities seek a successful exit. A capital return from a start-up company within a reasonable period presents the best chance of positive return for their investment, as most technology-based start-ups do not generate positive cash flows for many years and are, in fact, very capital-hungry.

It is more difficult to generalise about the business objectives of academics involved in spinouts. Where the academic becomes the fulltime CEO of the business (and effectively leaves his university post), his objectives may well not be similar to those of the typical SME owner (which we considered earlier). He might, for example, be more interested in preserving a well-paid long-term job than seeking a relatively short-term exit; he might place more emphasis on assisting mankind in general than becoming personally rich; he might consider the business to be his ‘baby’ and want to hold on to it. Where the academic’s involvement is not full time (for example where professional managers run the business) his objectives could be more like those of an investor, i.e. to achieve the maximum financial return in as short a time as possible, or within a defined time frame.

Why you should understand the credit approval process

It is difficult to value start-up businesses, because they lack a financial history against which to test their financial projections, so there is little point in obtaining a valuation of a start-up business for exit planning purposes. You could, however, get an opinion, or on estimate as to what your business could be worth at various future dates, if projections are met, to form some initial views on possible exit dates.

It is important for an owner of a mature business who is considering exit in the next five years to obtain both the current value of the business and realistic projected future valuations (assuming your operating objectives are achieved) from an expert.

DESIGNING YOUR MEP

Having completed your checklist and gathered your thoughts, you are now ready to progress to the next stage of collating and prioritising the various things you need to do. But before we get on to this, I wish to consider your operational business plan.

There are, of course, many different ways of writing business plans (and a whole publishing industry devoted almost entirely to the task of explaining how it should be done!). I am assuming that you understand this process and, indeed, already have an operating business plan in place.

Payday loans and planning ahead

For the owners of a start-up business an exit date will seem rather remote and you should not try to be too precise on this. Think about it in more general terms: do you aim to exit in five, 10, 15, or 20 years? With a mature business you need to decide whether to embark on a short-, medium- or a long-term exit plan and to set your target exit date. This will set the parameters of your planning and the extent to which you are able to implement operational improvements, removal of impediments to sale and personal financial planning.

The timing decision enables you to set up an initial time chart, from which you will design your MEP. I consider this more fully in ‘Designing your MEP’, below.

Where you are a minority shareholder, consider whether you have any power to establish an exit timeframe, or are you entirely dependent on the majority shareholder?

Choosing your exit option

Although the timing of your exit can be decided for you (by ill heath, for example) and the timing could influence the choice of option, you might wish to choose the optimum exit option first and then set your timetable. In some cases, the choice of exit option will fix a minimum time frame. For example, it could take only two years to prepare a business for a trade sale, but it will certainly take at least five years to prepare an heir for a family succession.

Other aspects of credit continuity

Where a business owner decides to leave business assets to an heir, he might decide that he will gift shares during his lifetime to avoid inheritance tax. The owner might, however, be concerned that the heir is married to (or is marrying) someone who is unsuitable and that the marriage will fail, resulting in the ex-husband or wife getting part of the family business. To guard against this, the business owner could place the shares in a discretionary trust, so that they are not part of the assets in a divorce. It is believed that the courts would, in most cases, look favourably on these arrangements. However, the use of trusts to defer or avoid taxation is an ever-changing aspect of the law and it is advisable to take expert advice before you make any decisions.

An aspect of continuity or risk planning we have not considered is the protection of your business from the loss of key management and staff. This is, basically, an insurance-related issue. The aim of keyman insurance is to compensate the business owner for the loss of vital managers and employees both for potential loss of profits, and also for the costs of replacing them. Key staff are often a vital part of a business’s value and attractiveness to a potential purchaser, so it is prudent to have protection in place to assist you to replace them.

Divorce of a creditowner

You can change your will to disinherit a spouse, but if you get divorced in the meantime things are not that simple! The law on the entitlement of spouses (usually wives) to their husbands’ business assets has changed dramatically in the UK over the last four years since the case of White v White and subsequent cases such as Cowan v Cowan and Lambert v Lambert. Without getting too technical, the result of these cases is that (in big-money cases at least) where a business owner is involved, spouses can expect as much as a 50:50 split of all assets following a divorce, including the value of the business. This could lead to the business owner having to sell his business; and as a judge in a recent case said: ‘The time has come when the goose would have to go to market.’

So, what can a business owner do to protect a business from what could be an ill-timed and unplanned (and, consequently, disastrous) sell off? One way could be to enter into a shareholders’ agreement that lays down who can own shares, as restricting ownership could help keep company shares out of the assets to be split on divorce. Also, involve outside shareholders in your business who are not related to you, so that the court has the problem of third party interests to contend with if it is considering a sale of the business.

These steps could be supported by a pre-nuptial agreement, which although not binding in the UK, could persuade the court against breaking up a business. Some experts believe that there are ways to increase the chances of a pre-nuptial agreement being accepted by the court, including updating it regularly and making reasonable provision for the spouse. Also, show that you have the ability to borrow against the business to meet your pre-nuptial obligations.

Recent Posts

Why are most credits unsatisfactory

A bad credit – where to draw the line

Find a payday loan that will suit all your goals

Your credit plans must be realistic

In debt, but for the right reasons

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About Me

Welcome to my blog! My name is Timothy Edwards. I am an economy professor (and a graduate) from Yale University and an author of several books on the subject of modern loans, credits and mortgage. This blog is all about loans and various kinds of problems you may encounter while taking one. I intend to share my credit experience with you and provide you with tools and knowledge to find an efficient loan.